Defense Stock Roundup: Boeing Suffers, Iraq Conflict Intensifies

Over the past five trading days, investors remained unimpressed about defense stocks leading to big sell-offs in many names. Although the sector is trying to plug the tepid budget challenges with acquisitions and business modernization endeavors besides boosting international orders, defense contractors found the going tough last week.

Among the important stories making it to the headlines, Iraq is once again in the limelight. As the conflict deepens in this war-ravaged country, the defense stocks would hope to gain from some brisk sales. Among the staple contract wins, Los Angeles-based defense contractor Northrop Grumman Corp. (NOC-Free Report) secured an $877 million award from the Pentagon. On the flipside side, The Boeing Co.’s (BA-Free Report) stock price dropped over 2% on Jun 11, the most in the last two months, following the surprise defeat of the U.S. House Majority Leader Eric Cantor of Virginia in a primary election. Again, mandatory inspections of Lockheed Martin Corp.’s (LMT-Free Report) F-35 fighter jets is underway after an in-flight scare last week (see the last recap here: Defense Stock Roundup for June 10, 2014).

Iraq Anarchy

Following president Obama’s vow on Jun 13 for not to put U.S. troops back on the ground, he notified Congress on Jun 16 that he will be sending up to 275 U.S. military personnel “to provide support and security for U.S. personnel and the U.S. Embassy in Baghdad.” Obama also outlined that the U.S. is also considering the deployment of an additional 100 soldiers in a nearby third country where they would be held in reserve until needed. The purpose will only be to defend U.S. personnel and the embassy in Baghdad and not engage in ground combat. Yet, the president informed the Congress that the U.S. military troops in Baghdad will be 'equipped for combat.'

Ominously, the Iraqi security failed to defend themselves in the face of attacks by the al-Qaeda connected Sunni militant group – the Islamic State in Iraq and Syria (ISIS). The insurgents, who want to establish their own state in Iraq and Syria, are reportedly pushing toward the capital city of Baghdad.

With the possibility of rising aggression in Iraq, heady days may finally be back for defense stocks again. This is particularly true if ground troops are ruled out while Pentagon beefs up firearms for the proposed military air strike.

Recap of the Week’s Most Important Stories

1. In connection with the Iraqi turmoil, Lockheed Martin – Pentagon’s prime contractor – has evacuated about 23 employees from northern Iraq owing to security worries. The employees were there to support the Iraq F-16 program. The political uprising in the country might delay the program schedule.

In a separate development, Lockheed Martin’s F-35 fighter jets will have to undergo obligatory inspections before further take off after a Marine Corps F-35B model experienced an in-flight emergency on Jun 10. The inspections were centered on the oil flow management valve being fitted on all the jet engines, which are built by Pratt & Whitney – a unit of diversified conglomerate United Technologies Corp. (UTX-Free Report). The valve provides oil flow to the engine bearing compartments.

2. Boeing’s stock price fell by more than 2% on Jun 11 – the most in the last two months and the biggest loser in the blue chip Dow Jones Industrial Average on that day, following a defeat of the U.S. House Majority Leader Eric Cantor of Virginia in a primary election (read more: Boeing Shares Suffer with Cantor's Surprise Loss).

3. Defense contractor Northrop Grumman has been receiving a nice mix of big and small contracts from the Pentagon. The company has lately clinched an $877 million deal from the Naval Supply Fleet Logistics Center to provide support to the Joint Force Development (:JFD) program in Suffolk (read more: Northrop Wins Joint Force Development Deal).

4. Exelis Inc. has completed the takeover of a privately held technology development and engineering company – Celestech – with locations in Chantilly, VA and Phoenix, AZ. Celestech develops tailored technical solutions for government and commercial clients, with detailed proficiency in advanced signal processing and communications systems. Celestech’s expertise in the dominion of data analytics will aid Exelis’ intelligence, surveillance, reconnaissance and analytics strategic growth platform as well as boost its C4ISR capabilities.

5. Last week, fiscal year 2015 Department of Homeland Security (DHS) Appropriations bill received the green signal from the House Appropriations Committee. The bill provides funding to strengthen the U.S. Homeland Security efforts, which comprises border security, laws enforcement, protection against cyber threats, reinforcing counternarcotic efforts, responding to natural disasters, and fighting terrorism.

The bill provides $39.2 billion in discretionary funding to DHS. Although this represents a decrease of $50 million from the fiscal year 2014 enacted level, it still marks an increase of $887.8 million from the President’s request for these programs.

Performance

Shares of all defense biggies were in the red in the past one week. The biggest loser Textron Inc. (TXT-Free Report) dropped 3.36% over the time frame, with Boeing following suit. In the past 6 months, General Dynamics Corp. (GD-Free Report) has led the way, with Textron holding the second spot. The following table shows the price movement of the major defense players over the past 5 trading days and during the last 6 months.

Company

Last Week

Last 6 months

LMT

-1.56%

+17.25%

BA

-3.26%

-2.46%

GD

-1.47%

+30.36%

RTN

-1.35%

+11.88%

NOC

-1.93%

+10.94%

COL

-0.75%

+11.89%

TXT

-3.36%

+22.59%

LLL

-1.51%

+22.11%

Other Stories You May Have Missed

• Under a U.S. Foreign Military Sales contract from the U.S. Marine Corps, Gyrocam sensor systems for use on tactical vehicles are being supplied to the Canadian Department of National Defense by Lockheed Martin. The eight Gyrocams will be used on Cougar Mine Resistant Ambush Protected vehicles. The latest deal comprises Lockheed Martin’s third international order for Gyrocam sensor systems.

• Raytheon Co. (RTN-Free Report) announced a partnership with European defense contractor Thales. Per the joint venture, the companies will invest a lump sum along with a minimum of 27 months of work into improving the functionality of Raytheon's tube-launched, optically-tracked, wireless-guided (:TOW) weapons system. The companies will also cooperate in manufacturing the missiles for their customers over the course of a five-year production agreement. Thales has committed to spend $20.2 million for the endeavor.

What’s Next in the Defense World?

The aerospace and defense sector is getting accustomed to budget cuts and the easy upward slope of last year is likely to hit a plateau. While the word “sequester” rang an ominous bell for the defense industry last year, the sector is holding up well this year. Moreover, the ongoing Iraqi civil war, escalating tensions in Eastern Europe and demand for defense products in the Middle East and other Asian nations may keep demand alive.

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